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Bolstered by some reasonably encouraging growth data, the mood in Asia overnight has been constructive, with broad gains in the major bourses of around 1%. Both Australia and South Korea recorded better than expected employment outcomes last month; in the latter, the unemployment rate fell to 3.4% in March from 3.7% previously.

In both Malaysia and the Philippines, exports soared by 15% in the most recent month. Also, Fed Vice Chairman Yellen gave her imprimatur to the Fed’s highly accommodative stance (she was hardly going to say anything else, now was she?), and the Fed’s Beige Book showed that all twelve regions are growing and that key indicators such as manufacturing, jobs and retail sales are showing signs of strength. Asian currencies are generally stronger overnight – the Aussie for instance is now at 1.04, up from yesterday’s three-month low of 1.0226.

Asia’s better tone was assisted by a slightly more sanguine session in Europe. Apart from some speculation that the ECB might be prepared to re-charge its SMP to bring down Spanish government borrowing costs, there was some good news to emerge from various US companies at the commencement of the latest reporting season.

Guest post by Forex Broker FxPro

Yesterday’s improvement may prove to be merely a brief respite – despite the best endeavours of the Rajoy government it is clear that the Spanish economy is going backwards at a rapid rate. Europe’s leaders will need to get its frequent-flyer cards ready because we can expect a lot more of those legendary late-night meetings over coming months.

 

Commentary

Chinese currency calm. Against the backdrop of increased economic uncertainty and (now) growing political instability, it has been no surprise that policy officials in China have opted for the status quo on currency policy. So far in 2012 the renminbi is unchanged against the dollar and there is very little prospect of Beijing allowing this situation to change much in the current quarter. Confirming some observations we have been making this year, the Asian Development Bank has now suggested that the pace of appreciation of the Chinese currency is likely to slow because of rising labour and other costs, which is adversely affecting competitiveness. Separately, China swung back into trade surplus in March thanks to a marked slowing of imports. Because of the timing of the Lunar New Year celebrations this calendar year, Chinese statistics have been more volatile than usual, which is complicating analysis. That said, import growth has been declining for some time now, providing further confirmation that the economy is definitely on a slower growth trajectory.

Will ECB be Saviour or Grim Reaper? Fresh from its position as Saviour of the Eurozone a few weeks ago, on the back of its 2nd LTRO auction of funds, the ECB is now facing a fresh dilemma with regards to its role in the sovereign debt crisis as yields on Italian and Spanish debt rise once again. Some stability emerged yesterday with the Spanish 10yr yield down to 5.80% after reaching 6% on Tuesday. The issue is what impact a resumption of the ECB’s bond-buying program would have on yields, given that there have been no purchases of any significant amount since the early part of the year. As we’ve talked about before however, with the ECB having established itself as a preferred creditor during the Greek restructuring process, investors naturally fear the same could hold true for other countries. The EU has always offered assurance that the ‘voluntary’ restructuring seen in Greece was a one-off, but this crisis has had more than its fair share of U-turns from politicians and others, so markets are naturally sceptical that this pledge will hold if push comes to shove. As such, if the ECB did come out in force in an attempt to push bond yields lower, then the reaction in markets would perhaps not be clear cut. In the first instance, yields may be pushed lower, but whether such a move could be sustained is far more debatable in the new circumstances. Far from being seen as the saviour, the ECB could be seen as the Grim Reaper, the presence of which signifies the impending demise of the countries’ solvency.